According to the 2019 Investment Management Outlook published by Deloitte, investment managers are pursuing a variety of organic and inorganic strategies to achieve their overall objectives. AI has graduated from a buzzword to an enabler that offers differentiated capabilities across the investment value chain.
In the past, we have discussed the role of AI algorithms in understanding market patterns and making investment decisions. The technology has now found promising applications in enhancing wealth advisory services, offering customised portfolios and digitising customer service.
Aside from expanding capabilities across the value chain, investment managers have worked to keep their product offering from becoming stale. For example, the availability of products with an investment mandate that complies with ESG issues is seeing a strong uptick.
A new pricing model for passive funds has emerged: the announcement of a no-fee fund was a seismic shift for the industry. With other investment managers also following suit with the launch of zero- commission platforms, a firm’s revenue-generation focus now moves towards securities lending, order- flow payments, and shareholder-servicing fees.
Dorian stressed that discussion with all levels of the value chain is vital.
Dorian cited some statistics that have widely debated:
- 17 of the 18 warmest years on record all have occurred since 2001
- The world recorded its warmest year in 2016
- 2018 was the first year when over half of the world’s population had access to the internet
- In 2019, over 50% of Asia’s citizens are expected to live in urban areas for the first time
- By 2020, the median age of the world’s population is expected to reach 30 years, up from 25 years in 1995.
- By 2023, India is expected to overtake China as the most populous nation in the world
Many fund managers have “latched on” to these themes and launched funds but there was a debate around where they fit in a portfolio; are they just a fad or a genuine set of portfolios? Also, how much do you/should you invest in thematic funds and how do these products fit in an asset allocation model?
- Smart Beta (Big Data)
This has also been a growing area of focus for the fund management sector.
Although smart beta funds typically attract higher fees than their vanilla counterparts, they continue to remain popular with investors. As of February 2019, 77 new smart-beta exchange-traded funds (ETFs) launched, which accounts for roughly a third of all ETFs that came to market in the past year, according to FactSet data as reported by ETF.com.
Smart beta funds also attracted a more significant increase in assets under management (AUM) over the period, growing at 10.9% compared to 4.3% for vanilla funds. In total, smart beta funds command $880 billion in total cumulative assets, up from $616 billion in 2016.
- Passive for free
Moves by fund managers such as Fidelity in relation to new pricing models have also begun to have an impact
Good governance is systemically important. The financial crisis of 2008 was a wake-up call for public and private sectors, demonstrating how issues of culture and conduct have systemic importance.
Public-private partnerships are expanding. Public-private collaboration has grown from addressing infrastructure and housing needs to tackling broader social and environmental issues.
Climate change is a reality. Energy sources are shifting. Technology is changing what we demand and how we consume, and social media is driving convergence in social norms.
We are living longer. By 2050, there will be 2.3 billion people in the world over age 65, according to the United Nations. Demographics are changing. Millennials and Generation-X are increasingly taking over from Baby Boomers in positions of influence, changing business, financial and political landscapes.
Regulation is providing tailwinds. ESG considerations have driven new regulations in a growing list of countries,
Value chains are global.
Investors can be quick to punish companies for child labour practices, human rights issues, environmental impact and poor governance.
This aspect was debated in detail during the session:
- Is it a concept that is bought or sold?
- Why would you not put all your funds in ESG as it is a philosophy
- Are there geographic challenges? Whilst it is easy to obtain data in the US, it is arguably more challenging to do so in other parts of the world – for example, South East Asia
- What does success look like?
Who owns the drivers of development?
This aspect was also actively debated. Is it:
- The distributor?
- The asset management sector?
And, is it driven by marketing or by demonstrable real need?
Other drivers of change
- Consumers - who increasingly care about the environment and how their funds are invested
- Regulation – the PROD rules and the need to demonstrate the suitability of products for specific market segments.
What does success look like?
There was no consensus!
Expert: Dorian Hughes, Independent Consultant